The Australian dollar rallied on Tuesday after an upbeat assessment of the global economy by the Reserve Bank of Australia, which stoked short-covering demand for higher-risk currencies, including the euro.

This put the dollar under broad selling pressure, pushing it to a three-month trough versus the Swiss franc. But the franc itself later came under pressure after weak Swiss consumer price data tempered the view deflation risks have receded.

The RBA held its key interest rate at 4.5 percent on Tuesday, saying policy was appropriate given caution in global markets even as it remained optimistic about its outlook for Asia and the domestic economy.

While the RBA had been widely expected to keep rates on hold, some market participants had been bracing for a very dovish statement after recent signs that the Chinese economy may be slowing.

Analysts said relief that the RBA was refusing to panic about the possibility of a global slowdown was helping to calm investors, prompting unwinding of extreme short positions in currencies including the euro.

The RBA statement showed no sign of the fears priced in by the market. It was a balanced statement, said Elsa Lignos, currency strategist at RBC.

It is now very unlikely that we will see more cuts this year and in fact there could be hikes.

She added that the Aussie's climb against the dollar was largely a proxy for improving risk demand.

By 0821 GMT (4:21 a.m. EDT), the Australian dollar had climbed 1 percent on the day to $0.8499, pulling away from a session low of $0.8317. It rose 1 percent to 74.43 yen.

Risky assets are performing well, there's been a gradual return of risk appetite, said Ulrich Leuchtmann, currency strategist at Commerzbank in Frankfurt, adding that a 1.6 percent rise in European shares was boosting the Aussie.

The euro rose 0.4 percent to $1.2602, poking through option barriers at $1.26. Still, the euro's gains were capped, with traders citing big stop-loss orders looming around $1.2610.

SWISSIE HIT BY DATA

The Swiss franc rose to 1.0563 per dollar in early European trade, according to Reuters data, its strongest since mid-April, only to pull back to around 1.0612.

The franc was hit by data showing Swiss CPI rose 0.5 percent in June from a year ago but were 0.4 percent lower compared with the previous month. Forecasts were for a 1.0 percent year-on-year rise and flat monthly reading.

The Swiss franc was slightly lower on the day against the euro at 1.3365 per euro, relinquishing gains after climbing as high as 1.3282 in earlier trade.

Global risk appetite was improving on Tuesday, having taken a beating in the past few weeks on growing worries about the health of the euro zone's banking system, a slowdown in China and risks of a double-dip recession in the United States.

But caution about the health of the global recovery remains, as highlighted by Harvard University economist Kenneth Rogoff.

The former International Monetary Fund chief economist and an expert on banking crises told Bloomberg Television China's property market was beginning a collapse that would hit banks.

(Additional reporting by Tokyo Forex Team, editing by Nigel Stephenson)